Yamini Aiyar
I had almost forgotten, till I saw a copy at a friend’s office yesterday, that every year in Parliament’s budget session, apart from presenting the annual budget, the Government of India tables an outcomes budget where every ministry reports on its outcomes. Remiss as I was in forgetting, I can’t be blamed, entirely. The outcomes budget was launched amidst much talk of reform in 2005 by then finance minister P Chidambaram. In a promising budget speech, he said ‘I must caution that outlays do not necessarily result in outcomes’. ‘The people of this country,’ he went on to add, ‘are concerned with outcomes’. And to his credit he launched the outcomes budget. In its short five year existence, the budget has been nothing but a damp squib. So valued is the outcomes budget that it never makes even the inside pages of newspapers and if you want to look for them on line – well best of luck to you.
What went wrong? Well, like many things in government, the idea is a good one but its implementation nothing short of poor. There are two critical elements to a successful ‘outcomes budget’. First, it requires the identification of clear, concise and quantifiable outcome indicators. These indicators need to be tangible and realistic. Here the outcomes budget falls short. Indicators are vague – the health ministry describes ‘funding of institutions’ and ‘widening of surveillance mechanisms’ as some of its key outcomes- making measurement impossible and irrelevant.
Second, for an ‘outcomes budget’ to achieve results it must be accompanied by increased information on performance against these indicators. The Finance Minister emphasized this at the launch of the outcomes budget, by pointing out that the objective of the budget is to put critical data on expected outcomes in to the public domain and allow for public scrutiny. On this count too, the outcomes budget has fallen far short of expectations. The budget itself was launched with much media fanfare but over the years it has simply disappeared from the public radar. There is no evidence of any proactive effort by government agencies to generate and disseminate information on progress.
In today’s Mint, Sanjiv Misra, former member of the 13th Finance Commission made some interesting observations about the failure of the outcomes budget. He points out that for reforms like the Outcomes Budget to be successful it requires the “establishment of countrywide performance benchmarks and costing norms for the public goods and services supplied; development of measurable performance indicators for the objectives set out; development of performance monitoring systems to regularly collect data on the actual results achieved; independent third-party evaluation of major programmes; and use of performance contracts to enforce accountability of key actors.” He so argues for the need to link performance on outcomes budgeting with pay.
The interesting thing about India today is that we have all these design instruments in place and we speak the right ‘speak’. Everyone in Government from the highest to the lowest agree that outcomes matter. Everyone in Government from the highest to the lowest agree that these need to be monitored and that he failure to do just this is the cause of our persistent poor performance on human development. Everyone in Government from the highest to the lowest has some interesting ideas on how to address this problem. As we speak the cabinet secretariat is running a seminar on performance oriented monitoring in the civil services. In fact the performance management wing of the cabinet secretariat has signed a significant number of contracts with Government of India departments to performance criterion and goals and there are some whispers about introducing pay for performance measures. At the same time the planning commission seems to be moving towards setting up the Independent Evaluation Office and a few months ago, PMO set up a delivery monitoring unit. There is also much talk of using technology through the UID and other instruments to develop a transparent expenditure information network that will allow for transparency and regular tracking of government funds. All of which have the potential to address the problems reforms like the outcomes budget faces. But for these instruments to take effect, we need political will – and that as we all know is sadly missing. What we need now is not more instruments but a better understanding of how to circumvent this lack of political will and push for change.
Yamini Aiyar is the Director, Accountability Initiative.
Showing posts with label 13 Finance Commission. Show all posts
Showing posts with label 13 Finance Commission. Show all posts
Thursday, 1 April 2010
Wednesday, 3 March 2010
Budget 2010 - A Preliminary Assessment
Anit Mukherjee
The much-anticipated budget for the financial year 2010-11 can be termed as a consolidation budget. It needs to be looked upon in the context of a rebounding economy and relatively stable political environment but with high inflationary pressures and the need to significantly alter the structure of government’s income and expenditure. The budget also has to be seen in the context of the recommendations of the Thirteenth Finance Commission (FC-XIII). Being a statutory commission, the recommendations are in a large part binding upon the government.
The road map for fiscal consolidation as enunciated by both the budget and the FC-XIII report are very clear. The fiscal deficit has to be reduced progressively, and the revenue deficit has to be eliminated altogether. Moreover, accounting tricks of previous years such as oil bonds and fertilizer subsidies being kept outside the deficit calculation has to be done away with. In both these areas, Budget 2010 makes a good beginning by projecting a fiscal deficit of 5.5 percent for FY 2010-11. Reduction in the fiscal deficit essentially means that the government would be borrowing less from the Reserve Bank of India (RBI), therefore leaving a greater share of credit for private sector. This also means that the pressure on interest rates is reduced, since the government has first charge on the available credit from RBI. Monetary policy can be calibrated to tackle inflation, now that the government has signaled its intent on a rollback of the stimulus measures.
This brings us to the most important policy direction contained in Budget 2010 – a structural change in the way government earns its income and spends the money especially in infrastructure and social sectors such as education, health and rural development. On the income side, the next year promises to be the ‘Big-bang’ year if both the Direct Tax Code (DTC) and the Goods and Service Tax (GST) are introduced from April 1, 2011. The Finance Minister is clear about the former, but the latter depends whether the States can agree to a unified GST rate and the consequent compensation for the tax revenues foregone. Given the fact that the GST deliberations have progressed substantially, the remaining issues may be more technical – constitutional amendments, GST database and the mode of revenue sharing. If both the DTC and GST come into force from 2011 as expected, the revenue position of the Central government is expected to improve significantly over the second half of the government’s mandate. The high-point of Budget 2010 – the cut in personal income tax – is to lay the groundwork for the implementation of DTC from next year. This was also made possible by the fact that all the pay arrears on account of the recommendations of the Sixth Pay Commission was already factored into the previous budget.
On the indirect taxes, the increase in central excise duties from 8 to 10 percent reflects a calibrated exit from the stimulus package announced over the last 18 months. The re-imposition of customs duties on petroleum may signify that price decontrol of petrol and diesel may come later rather than sooner. However, silence on kerosene and LPG is a hint towards a change of the pattern of subsidies that may come later in the year as per the recommendations on this topic presented to the government, the latest being the Kirit Parikh Committee Report.
As noted earlier, the government expects the GST to be rolled out from April 2011. To that effect, for the first time the central excise and service tax rates have been aligned at the same rate of 10 percent. If the compensation to the states on account of their revenue loss has to be kept at reasonable limits, then a 16-18 percent GST rate could be the consensus. In that sense, this budget consolidates the fiscal position of the Central government and puts a Central GST rate of 10 percent as an acceptable proposition. It is now up to the Empowered Committee of State Finance Ministers to hammer out an agreement before the next budget.
The Economic Survey which was released the day before the budget is a welcome departure from the uninspiring document that it usually is. The major policy guidelines are enunciated in Chapter 2 of the Survey where the most interesting discussion is about subsidies. It has been acknowledged in many fora that subsidies are a huge burden on the government exchequer, and limit the flexibility of the ruling dispensation to reduce them mainly due to populist political pressures. The total subsidy bill on three major items – food, fuel and fertilizer – is estimated to be nearly 1.5 lakh crore, or nearly 3 percent of GDP. On the other hand, parties on the Left argue that this is necessary to protect the interests of the poor, which makes them vulnerable to price shocks and leaves them without a social safety net.
There is a point to both the arguments, but until now the middle ground has been elusive. The budget has signaled that the answer to this dilemma lies in better targeting of subsidies for the poor, and in the larger national interest. The decontrol of nutrient based fertilizer prices (and the increase in urea) is the first step – already the government projects significant savings from this measure in this year’s budget. Against the backdrop of the Food Security Bill to be tabled later this year, the budget hints that food subsidy and buffer stock management will undergo systemic changes by leveraging new IT initiatives such as the Unique ID Number (UID) and the conversion of the food subsidy into a cash transfer after identification of the beneficiaries. The kerosene and LPG subsidies may actually be the first ones to be converted into this system. Over the next two years, therefore, a lot of emphasis would be on prudent management of government expenditure (especially on the subsidies front) and in improving targeting of the beneficiaries. If duplicate ration cards are weeded out from the system, everybody will gain. If kerosene is not used to adulterate diesel, fuel consumption and fuel emissions will both go down. The challenge is to change the incentives, enforce the rules and track the outcome.
This year’s budget does not break new ground. Rather, it is an effort to level the playing field in many areas. The question is how far the intent will be translated into action. The government’s record on inflation management has been ineffective until now, the disinvestment process is running into rough weather and monetary tightening is on the cards. The year ahead will be both challenging and exciting in different ways. We can then look forward to a ‘Big Bang’ 2011 budget.
Anit Mukherjee is with the National Institute of Public Finance Policy (NIPFP).
The much-anticipated budget for the financial year 2010-11 can be termed as a consolidation budget. It needs to be looked upon in the context of a rebounding economy and relatively stable political environment but with high inflationary pressures and the need to significantly alter the structure of government’s income and expenditure. The budget also has to be seen in the context of the recommendations of the Thirteenth Finance Commission (FC-XIII). Being a statutory commission, the recommendations are in a large part binding upon the government.
The road map for fiscal consolidation as enunciated by both the budget and the FC-XIII report are very clear. The fiscal deficit has to be reduced progressively, and the revenue deficit has to be eliminated altogether. Moreover, accounting tricks of previous years such as oil bonds and fertilizer subsidies being kept outside the deficit calculation has to be done away with. In both these areas, Budget 2010 makes a good beginning by projecting a fiscal deficit of 5.5 percent for FY 2010-11. Reduction in the fiscal deficit essentially means that the government would be borrowing less from the Reserve Bank of India (RBI), therefore leaving a greater share of credit for private sector. This also means that the pressure on interest rates is reduced, since the government has first charge on the available credit from RBI. Monetary policy can be calibrated to tackle inflation, now that the government has signaled its intent on a rollback of the stimulus measures.
This brings us to the most important policy direction contained in Budget 2010 – a structural change in the way government earns its income and spends the money especially in infrastructure and social sectors such as education, health and rural development. On the income side, the next year promises to be the ‘Big-bang’ year if both the Direct Tax Code (DTC) and the Goods and Service Tax (GST) are introduced from April 1, 2011. The Finance Minister is clear about the former, but the latter depends whether the States can agree to a unified GST rate and the consequent compensation for the tax revenues foregone. Given the fact that the GST deliberations have progressed substantially, the remaining issues may be more technical – constitutional amendments, GST database and the mode of revenue sharing. If both the DTC and GST come into force from 2011 as expected, the revenue position of the Central government is expected to improve significantly over the second half of the government’s mandate. The high-point of Budget 2010 – the cut in personal income tax – is to lay the groundwork for the implementation of DTC from next year. This was also made possible by the fact that all the pay arrears on account of the recommendations of the Sixth Pay Commission was already factored into the previous budget.
On the indirect taxes, the increase in central excise duties from 8 to 10 percent reflects a calibrated exit from the stimulus package announced over the last 18 months. The re-imposition of customs duties on petroleum may signify that price decontrol of petrol and diesel may come later rather than sooner. However, silence on kerosene and LPG is a hint towards a change of the pattern of subsidies that may come later in the year as per the recommendations on this topic presented to the government, the latest being the Kirit Parikh Committee Report.
As noted earlier, the government expects the GST to be rolled out from April 2011. To that effect, for the first time the central excise and service tax rates have been aligned at the same rate of 10 percent. If the compensation to the states on account of their revenue loss has to be kept at reasonable limits, then a 16-18 percent GST rate could be the consensus. In that sense, this budget consolidates the fiscal position of the Central government and puts a Central GST rate of 10 percent as an acceptable proposition. It is now up to the Empowered Committee of State Finance Ministers to hammer out an agreement before the next budget.
The Economic Survey which was released the day before the budget is a welcome departure from the uninspiring document that it usually is. The major policy guidelines are enunciated in Chapter 2 of the Survey where the most interesting discussion is about subsidies. It has been acknowledged in many fora that subsidies are a huge burden on the government exchequer, and limit the flexibility of the ruling dispensation to reduce them mainly due to populist political pressures. The total subsidy bill on three major items – food, fuel and fertilizer – is estimated to be nearly 1.5 lakh crore, or nearly 3 percent of GDP. On the other hand, parties on the Left argue that this is necessary to protect the interests of the poor, which makes them vulnerable to price shocks and leaves them without a social safety net.
There is a point to both the arguments, but until now the middle ground has been elusive. The budget has signaled that the answer to this dilemma lies in better targeting of subsidies for the poor, and in the larger national interest. The decontrol of nutrient based fertilizer prices (and the increase in urea) is the first step – already the government projects significant savings from this measure in this year’s budget. Against the backdrop of the Food Security Bill to be tabled later this year, the budget hints that food subsidy and buffer stock management will undergo systemic changes by leveraging new IT initiatives such as the Unique ID Number (UID) and the conversion of the food subsidy into a cash transfer after identification of the beneficiaries. The kerosene and LPG subsidies may actually be the first ones to be converted into this system. Over the next two years, therefore, a lot of emphasis would be on prudent management of government expenditure (especially on the subsidies front) and in improving targeting of the beneficiaries. If duplicate ration cards are weeded out from the system, everybody will gain. If kerosene is not used to adulterate diesel, fuel consumption and fuel emissions will both go down. The challenge is to change the incentives, enforce the rules and track the outcome.
This year’s budget does not break new ground. Rather, it is an effort to level the playing field in many areas. The question is how far the intent will be translated into action. The government’s record on inflation management has been ineffective until now, the disinvestment process is running into rough weather and monetary tightening is on the cards. The year ahead will be both challenging and exciting in different ways. We can then look forward to a ‘Big Bang’ 2011 budget.
Anit Mukherjee is with the National Institute of Public Finance Policy (NIPFP).
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